EDC Firm Closes Its Doors Citing Tax Rules Ambiguity

July 30, 2004 – "Class 'A' brand new furnished commercial space in Havensight, Port of Sale for sublease," the classified ad in a recent edition of a print newspaper reads. "Office complete and available with brand new carpeting, new desks and office furniture, new air conditioning … perfect space for an EDC firm to move into today."
It is safe to say it would be a perfect space for a new Economic Development Commission beneficiary company to move into, because one is moving out — because of the confusion caused by a recent U.S. Internal Revenue Service notice that seems to be in direct opposition to what the Economic Development Commission legislation allows under the local program.
Consolidated National Corp. closed its doors on Friday, laying off eight local employees.
CNC's vice president, Fred Rice, told the Source he thought all eight would be able to find other jobs. "We have tried to help them with that," he said.
Rice said he had to pull his business out of the Virgin Islands because "there is so much indecision" and "nobody knows" what the rules are.
Michelle Vanterpool, CNC administrative assistant, confirmed that all of her co-workers have found other employment, mostly with other EDC beneficiaries. She doesn't have another position yet, but only because she is weighing five offers, three of them with EDC companies.
Vanterpool, who was born on St. Thomas, returned home seven years ago after attending college on the mainland. She has worked for CNC for a year.
Rice said he has to get on with his business elsewhere because he can't afford to wait around while the wrangling goes on between the local and federal governments. "We've got business to conduct," he said Friday afternoon from Cyril E. King Airport.
Rice was clear that he is a bona fide V.I. resident conducting business completely within the parameters of his EDC certificate. "Everything we do is clearly stated in our certificate," he said. "We make loans back in the states."
That is where the biggest rub comes in, according to most tax-law experts as well as concerned beneficiaries. The EDC program allows financial management companies to receive benefits on money made outside the territory — while excluding money made in the territory, in order to protect local firms from unfair competition in the same businesses.
Dozens of companies have been established and and have been conducting business in the Virgin Islands under those conditions. The IRS notice, sent in June without any prior notice to V.I. officials, appears to say exactly the opposite. The U.S. code, the notice states, "grants limited authority to the USVI to reduce the USVI tax liability with respect to income from USVI sources or income effectively connected with a trade or business within the USVI."
One tax expert agrees with Rice. Joseph Erwin, who according to his Web site specializes in federal tax controversies and U.S. taxation of international transactions, wrote in the introduction to an article he wrote for "Tax Notes," in the "Tax Analysts" publication: "The notice has had the effect of imparting no small amount of confusion upon taxpayers and practitioners in this area and undermines the viability of the economic development program of the U.S. Virgin Islands contrary to the expressed intent of the Congress to make the territories more self-sufficient."
The 1986 act that established the tax-break program to encourage the development of new businesses in the territory called for the IRS to work with the V.I. Internal Revenue Bureau, according to several experts and people involved in the negotiations at the time. In the ensuing 18 years that has not happened.
A year before the treasury notice arrived, and shortly after federal agents raided an EDC company on St. Croix, V.I. economist Richard W. Moore, in an address to a Rotary club on St. Croix, lamented what he called the "high cost of lost leadership."
Moore said then: "Had the … cooperative environment that existed between the government of the U.S. Virgin Islands and the U.S. Treasury Department, at least up until 1986, continued , the completion of what the U.S. Treasury Department was tasked to do by the U.S. Congress in 1986, requested to do by the V.I. government and private sector professionals during each and every year since 1990, and agreed to do in an Implementation Agreement signed in January 1987 would have occurred I would not be here today … fearfully anticipating criminal indictments of U.S. Virgin Islands taxpayers for allegedly evading what may be purported as U.S. tax obligations and holding our breath regarding the drop of the other shoe."
A year later the other shoe dropped, and the fallout that some have feared began Friday.
"Hopefully they'll get it straightened out," Rice said, "but I don't have the resources to wait for that."
Rice said he is not leaving the Virgin Islands; he is only taking his business out of the Virgin Islands at this point. He has not sold his home and said he is considering keeping it. "We love it here," he said.
Rice and many other EDC beneficiaries contribute more to the local economy than 10 percent of their eligible income – which Louis M. Willis, director of the V.I. Bureau of Internal Revenue, said recently amounts to more than 25 percent of the revenues coming into the local treasury. Many develop other local businesses that pay full taxes. They hire employees, buy homes and cars, shop in local stores and eat in local restaurants. Beneficiaries also are required to contribute to local charities.
When asked how often he dined out, Rice replied, "Every night. I think I pay the rent at Craig and Sally's."
According to reliable sources, including one individual within the EDC, it's likely that Rice is just the first of what will be many beneficiaries leaving the territory rather than taking the risk that the complicated tax matters will be resolved swiftly and to their benefit.
Frank Schulterbrandt, chief executive officer the Economic Development Authority, did not return a telephone call for comment Friday afternoon.
Back Talk

Share your reaction to this news with other Source readers. Please include headline, your name, and the city and state/country or island where you reside.

Publisher's note : Like the St. Croix Source now? Find out how you can love us twice as much — and show your support for the islands' free and independent news voice … click here.

Print Friendly, PDF & Email